Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

Covered Interest Arbitrage Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

There is (at least)one profitable arbitrage at these prices.What is it?

Purchasing Power Parity (PPP)theory states that

The International Fisher Effect suggests that

Generally unfavorable evidence on PPP suggests that

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 5% APR in the U.S.and 3% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 3% APR in the U.S.and 5% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

Suppose that the one-year interest rate is 4.0 percent in the Italy,the spot exchange rate is $1.60/€,and the one-year forward exchange rate is $1.58/€.What must one-year interest rate be in the United States?

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i_€ = 4%.

The Fisher effect can be written for the United States as:

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m,traded for dollars at the spot rate and invested at i_$ = 4%.

Covered Interest Arbitrage Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed €1,000,000 for one year,how much money would you owe at maturity?

Studies of the accuracy of paid exchange rate forecasters

If a foreign county experiences a hyperinflation,

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i_$ = 2% and in the euro zone the one-year interest rate is i_€ = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain profit via covered interest arbitrage.

Covered Interest Arbitrage Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

There is (at least)one profitable arbitrage at these prices.What is it?

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i_$ = 2% and in the euro zone the one-year interest rate is i_€ = 6%.The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities?

If the exchange rate follows a random walk